By Enrique JorgeThis article was first published on www.focus-economics.com.
Encouraged by Russia’s annexation of Crimea, pro-Russian armed groups took control of several cities in eastern Ukraine and called for those territories to join the Russian Federation. Diplomats from Ukraine, Russia, the European Union and the United States negotiated an agreement aimed at defusing the crisis in Geneva on 17 April. Nonetheless, the situation continued to escalate and diplomats generally consider that the Geneva agreement has failed to resolve the conflict. In the last week, clashes extended to the south of the country and reached the city of Odessa, where 46 people died in a fire at the House of Trade Unions.
Further escalation in eastern Ukraine could jeopardize the presidential elections scheduled for 25 May. According to recent polls, the front runner is Petro Poroshenko, a businessman who is currently acting as the Second Minster of Trade and Economic Development in the caretaker government. Poroshenko is supported by the Ukrainian Democratic Alliance for Reform (UDAR), led by Vitaly Klitschko. Former Prime Minister Yulia Tymoshenko from the Fatherland Party is seen as the second primary contender, although she scored lower in the most recent surveys.
In the meantime, the IMF approved the two-year USD 17.1 billion Stand-By Arrangement (SBA) on 30 April. The IMF disbursed nearly USD 3.2 billion to support Ukraine’s budget immediately. The second and third disbursements will be based on reviews every two months and performance criteria and the remainder will be subject to quarterly reviews, ending on March 2016. The SBA will also unlock an additional approximately USD 15 billion in funds from other donors, including the World Bank, the European Union, Canada and Japan. The fresh IMF funds will help steer the country away from bankruptcy. However, Christine Lagarde, Managing Director of the IMF, cautioned that, “risks to the program are high. In particular, further escalation of tensions with Russia and unrest in the east of the country pose a substantial risk to the economic outlook.”
Economy falls back into recession
GDP contracted 1.1% over the same period last year in the first quarter according to a preliminary estimate the National Statistics Institute released on 30 April. The contraction contrasted the 3.3% expansion observed in the last quarter of 2013, which had marked the first expansion since Q2 2012.
FocusEconomics Consensus Forecast panelists see the country sliding into a deep recession this year. The panel sees GDP contracting 4.1% in 2014, which is down 0.1 percentage points over the previous month’s projection. For 2015, the panel expects the economy to expand 1.3%.
* Note: FocusEconomics Consensus Forecast is a monthly forecast based on 29 individual projections from investment banks, consultancies and think tanks. For more information, please contact us via www.focus-economics.com.